The last three years have been positive for investors in Australia and New Zealand Banking Group (ASX: ANZ). That's because the bank's shares have risen by 51%, which is ahead of the ASX's gain of 36%. And, while there are valuation concerns surrounding the wider banking sector, as well as uncertainty regarding the prospects for the Aussie economy and the housing sector, further outperformance of the ASX could be on the cards for investors for these three reasons.
Favourable operating climate
For banks such as ANZ, the RBA's decision to adopt an ever-looser monetary policy is great news. Certainly, there are no guarantees that it will have the desired effect in terms of boosting GDP growth and reducing unemployment to more palatable levels. However, in terms of demand for new loans, ANZ should benefit since credit will become cheaper, thereby encouraging consumers to spend more and businesses to consider larger and more numerous capital expenditure projects.
Furthermore, a lower interest rate means that the cost of servicing existing loans will fall. This should equate to fewer bad debts for ANZ and, with asset prices likely to receive at least a partial boost from a lower interest rate, it should mean fewer asset writedowns for ANZ over the medium term. This is likely to have a positive impact on the bank's bottom line moving forward.
Income prospects
A lower interest rate is also likely to mean that income-seeking investors rely to an even greater extent on dividends for their income. In fact, it would not be a major surprise for bank account rates to fail to beat inflation in 2015 and beyond, which would equate to a negative real terms return for savers. As such, lower interest rates could act as a catalyst on the share price of ANZ, with its yield of 5.6% (fully franked) being considerably higher than the ASX's yield of 4.5%.
In addition, ANZ is expected to offer a real-terms increase in dividends over the next two years, with dividends per share set to rise at an annualised rate of 4.3% during the period. And, best of all, ANZ's shareholder payouts appear to be highly sustainable due to them being covered 1.44 times by profit in the current year. And, with ANZ having increased dividends by 11.8% per annum during the last five years, it has a great track record in terms of having a shareholder-friendly dividend policy, which bodes well for payouts post-2016.
Valuation
Clearly, many investors are concerned about the valuations of a number of banks, although the sector still trades at a 20% discount to the ASX, with it having a price to earnings (P/E) ratio of 13.2 versus 16.4 for the ASX. Furthermore, ANZ trades at a discount to the wider index, with it having a P/E ratio of just 12.1.
Certainly, it may not be 'dirt cheap' but, with a clear catalyst in the form of its impressive income potential and a favourable operating environment, there is scope for ANZ to be subject to an upward rerating, thereby allowing it to continue its trend of impressive total returns, which amount to 10% per annum over the last ten years.
